Is Anhui Gujing Distillery (SZSE:000596) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Anhui Gujing Distillery Co., Ltd. (SZSE:000596) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Anhui Gujing Distillery

How Much Debt Does Anhui Gujing Distillery Carry?

As you can see below, at the end of March 2024, Anhui Gujing Distillery had CN¥207.0m of debt, up from CN¥106.7m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥17.3b in cash, so it actually has CN¥17.1b net cash.

How Strong Is Anhui Gujing Distillery's Balance Sheet?

The latest balance sheet data shows that Anhui Gujing Distillery had liabilities of CN¥15.4b due within a year, and liabilities of CN¥607.9m falling due after that. On the other hand, it had cash of CN¥17.3b and CN¥4.98b worth of receivables due within a year. So it can boast CN¥6.31b more liquid assets than total liabilities.

This short term liquidity is a sign that Anhui Gujing Distillery could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Anhui Gujing Distillery has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Anhui Gujing Distillery has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Anhui Gujing Distillery can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Anhui Gujing Distillery may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Anhui Gujing Distillery recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Gujing Distillery has net cash of CN¥17.1b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So is Anhui Gujing Distillery's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Anhui Gujing Distillery (of which 1 shouldn't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.